China Writing its Own Merger Story

Alongside China’s booming economy and the country’s appetite for steel, concrete, copper and other construction materials, the last decade has demonstrated that not only can China consume materials, but its corporations are also capable of gobbling up companies around the world.

Like other large national and multinational firms worldwide, Chinese firms have now entered the market for corporate control through mergers and acquisitions (M&As) with rivals. The number of mergers in just the first few months of 2016 has already matched 2015’s record year, at a value of US$106 billion.

The nature of mergers and acquisitions is that they tend to come in waves. For example, the third wave of mergers between the mid-1960s and 1980s saw companies buy into different markets through mergers to diversify and strengthen their positions.

The fourth wave during the 1990s saw corporations grow through mergers with rivals in the same field into mega-corporations. The most recent, sixth wave between 2003 and 2008, only now being documented by us, saw for the first time Chinese firms begin to actively participate in corporate takeovers.

As markets globalise, so does the market for corporate control. Mergers and acquisitions, traditionally seen only as an aspect of the Western economic sphere centred on the US and Europe has now gone global as companies themselves – and not just their products and services – are traded worldwide.

However, the majority of mergers and acquisitions tend to actually destroy market value: stock market values tend to decline dramatically after a merger is announced. Yet managers and shareholders continue to be lured into this mostly irrational, exuberant activity. Now Chinese firms are dominating this market, there is good reason to study how Chinese acquisitions fare.

Is this the Chinese century? manostock

In our research, due for publication in the journal Management & Organization Review, Killian McCarthy of Groningen University and I found that the deals Chinese managers make perform better financially than those arranged by their opposite numbers in Europe and the US. The reasons for this better performance are still somewhat unclear.

Chinese M&A deals by nature are more often cross-border. They are also more likely to be hostile takeovers. This should bode ill for their prospects to create value, available research centering on Western economies suggests, as the employees in the acquired firm will not welcome being directed by unfriendly outsiders. Yet the opposite is true for acquisitions by Chinese firms: on average, Chinese firms acquiring other firms see their stock market value increase more than any other firm.

Why?

Our research offers some suggestions – but they are only suggestions, because the data typically collected about M&A deals is statistical, and includes little information about the human factors in how deals are drawn up and agreed.

One explanation for why Chinese corporate players forge better M&A deals than those in the West is a combination of more close, “personal” attention to the deals and to those individuals making them. At the same time, they are also more willing to walk out of a deal.

In Western firms, often it is the ego and bonuses of chief executive officers that prevent careful consideration of the true value of deals, leading corporations to proceed with deals that they should have walked away from or for which they should have negotiated better terms. Deals by Chinese players take longer to conclude, and may involve more due diligence, yet are also more likely to be suddenly cut short.

In another piece of as-yet unpublished research, we show that Chinese companies acquiring US and UK companies do better than those acquiring companies from continental Europe. Chinese managers appear to find it easier to deal with partners that have the more singular focus on market value that exists in an Anglo-Saxon context.

As Chinese firms are no longer content to merely produce goods commissioned by their Western customers, they enter and reshape global markets including the one in which corporations themselves are bought and sold.

The cult of the magical, essential chief executive that is prevelant in the West is emerging in China, too, and this may start to have a negative effect on Chinese M&A performance in the future. At least for now, Chinese managers seem able to do well in this market, although once the lowest-hanging fruit has been picked, they may find it more difficult to achieve the same value in the future.

Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among all major advanced economies and large emerging economies. In addition to advisory activities (www.differencegroup.net), he is affiliated with India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, please see http://www.differencegroup.net/. Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

Asia Pathways is a blog of the Asian Development Bank Institute (ADBI). ADBI welcomes contributions to Asia Pathways. Information on how to contribute to the blog is available at our guidelines for authors.

Located in Tokyo, Japan, ADBI is the think tank of the Asian Development Bank. Its mission is to identify effective development strategies and improve development management in ADB's developing members countries. ADBI has an extensive network of partners in the Asia and Pacific region and beyond. ADBI's activities are guided by its three strategic priority themes of inclusive and sustainable growth, regional cooperation and integration, and governance for policies and institutions.